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Crackdown on Inheritance Tax underpayment

HM Revenue & Customs (HMRC) is targeting the undervaluation of estates, particularly in relation to residential properties passed on to beneficiaries.

And whilst revenue generated by Inheritance Tax (IHT) and the percentage of estates that are subject to IHT continue to increase year on year, there are concerns that the crackdown may impact heavily on families who are not “cash-rich”.

More than 5,000 estates were investigated for underpayment of IHT last year – an increase of 5% on the figure for the previous year - with the accuracy of valuations coming under scrutiny.

In some cases, HMRC has argued that ‘additional value’ should be included for homes which could be refurbished or developed.

Where HMRC can demonstrate that an IHT underpayment has occurred, the expectation is that the shortfall will be recouped from the estate, in addition to a penalty sum which may be significant, but if the estate has been distributed then the Executors (if there was a Will) or Administrators (if there was no Will) become personally liable for the additional IHT due.

In England and Wales, IHT is charged at a 40% rate on all estates valued above the IHT threshold or ‘Nil Rate Band’, set at £325,000 per person, although there is also the possibility to claim an additional ‘Residence Nil Rate Band’, currently set at £125,000 per person, in certain circumstances.

However, there are numerous ways families and individuals can mitigate their eventual IHT liability.

For example, whilst lifetime gifts made from a person’s estate within the final seven years of their life are included in the value of their estate for IHT purposes, the first £3,000 given away in any tax year is excluded, as are small gifts of up to £250 per person per tax year, and certain gifts made on the marriage of a child or grandchild.

Regular Will reviews to ensure IHT efficiency is another useful measure, particularly if your personal circumstances have altered since your last review and also in relation to the effect of the Nil Rate Band and Residence Nil Rate Band.

To find out how we can help with protecting your estate and IHT planning, please contact us on 01733 888888.